A:

The word "DRIP" is an acronym for dividend reinvestment plan, but DRIP also happens to describe the way the plan works. With DRIPs, the dividends that an investor receives from a company go directly towards the purchase of more stock, making the investment in the company grow little by little.

How DRIPs Work

Many companies offer shareholders the option to reinvest the amount of issued dividends into additional shares through a DRIP. Since these shares usually come from the company’s own reserve, they are not marketable through the stock exchanges. DRIPs must be redeemed directly through the company.

The "dripping" of dividends is not limited to whole shares, which makes these plans somewhat unique. The corporation keeps detailed records of share ownership percentages.

For example, if the TSJ Sports Conglomerate paid a $1 dividend on a stock that traded at $10, every time there was a dividend payment, investors with the DRIP plan would receive one-tenth of a share.

Lower Cost Way to Accumulate Shares

DRIPs use a technique called dollar-cost averaging intended to average out the price at which you buy stock as it moves up or down over a long period. You are never buying the stock right at its peak or at its low with dollar-cost averaging.

Company-operated DRIPS are popular with shareholders as a lower cost way to accumulate additional shares. There are no commissions or brokerage fees involved. Many companies offer shares at a discount through their DRIP ranging from one to ten percent off the current share price. Between the price discount and no trading commissions, the cost basis for owning the shares can be significantly lower than if the shares were purchased on the open market.

(To learn more, see The Perks of Dividend Reinvestment Plans.)

RELATED FAQS
  1. How can I purchase stock directly from a company?

    There are a few circumstances in which a person can buy stock directly from a company, including direct stock purchase plans, ... Read Answer >>
  2. How and when are stock dividends paid out?

    A dividend is determined quarterly after a company finalizes its income statement. Dividends are paid either by check or ... Read Answer >>
  3. Why do some companies pay a dividend, while other companies do not?

    There are several reasons why a company might pass some of its earnings on to shareholders as dividends rather than reinvest ... Read Answer >>
Related Articles
  1. Investing

    5 Ways to Lose Money With a Dividend Reinvestment Plan

    Enrolling in a dividend reinvestment plan can backfire if you're not using it wisely, costing you money in the process.
  2. Investing

    How to Reinvest Dividends from ETFs

    Learn about reinvesting ETF dividends, including the benefits and drawbacks of dividend reinvestment plans (DRIPs) and manual reinvestment.
  3. Retirement

    Should Retirees Reinvest Their Dividends?

    Find out why dividend reinvestment may or may not be the right choice for retirees, depending on their financial needs and investment goals.
  4. Financial Advisor

    How To Invest If You're Broke

    Here are a few ideas for those people who don't see any available funds for investing.
  5. Investing

    Dividend Facts You May Not Know

    Discover the issues that complicate these payouts for investors.
  6. Financial Advisor

    How mutual funds pay dividends: An overview

    The process by which mutual fund dividends are calculated, distributed and reported is fairly straightforward in most cases. Here's a look.
  7. Investing

    Put Dividends to Work in Your Portfolio

    Find out how a company can put its profits directly into your hands.
  8. Investing

    Why Dividends Matter

    Seven words that are music to investors' ears? "The dividend check is in the mail."
RELATED TERMS
  1. Dividend Reinvestment Plan - DRIP

    A dividend reinvestment plan (DRIP) is an arrangement that allows ...
  2. Drip Pricing

    A pricing technique in which only part of a product or service’s ...
  3. Distribution Reinvestment

    A process whereby the distribution from a limited partnership, ...
  4. Reinvestment

    Reinvestment is using dividends, interest and any other form ...
  5. Formula Investing

    Formula investing is a method of investing that rigidly follows ...
  6. Accumulated Dividend

    An accumulated dividend is a dividend on a share of cumulative ...
Hot Definitions
  1. Receivables Turnover Ratio

    Receivables turnover ratio is an accounting measure used to quantify a firm's effectiveness in extending credit and in collecting ...
  2. Treasury Yield

    Treasury yield is the return on investment, expressed as a percentage, on the U.S. government's debt obligations.
  3. Return on Assets - ROA

    Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
  4. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  5. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  6. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
Trading Center